Inflation pricing continues to be in focus

Market movers today

Focus today turns to inflation with US and Sweden releasing CPI.

On the US CPI, we think there are two things to look out for. The first one is whether the monthly increases in CPI core remain high. The other is whether high price increases spread to more categories than e.g. cars, which would signal that inflation is broadening and could become more persistent.

US also releases NFIB small business optimism index, which contains an index on labour shortage and wage compensation plans that are worth keeping an eye on. They have both increased to very high levels over the past months.

On Swedish CPI we are in line with the Riksbank's forecast but would highlight high uncertainty on the outcome.

The 60 second overview

Euro Area inflation expectation: The inflation pricing continues to be in focus. From the early European trading session yesterday, 5y5y inflation swaps touch new multi-year high at 1.82%, but was later reversed to end broadly unchanged on the day around 1.79%. Last time such levels were reached was in 2014, prior to ECB starting QE. While fundamentally we remain unconvinced that inflation pricing will stay elevated in 2022, we do not want to fade the recent rally from a risk-reward perspective as the momentum is rather strong. ECB's Schnabel gave a strong speech clearly outlining that she is in the 'transitory inflation narrative' camp, however she did also address certain upside risks that warranted special attention. She stressed 'A premature monetary policy tightening in response to a temporary rise in inflation would choke the recovery and be most harmful to those who are already suffering from the current spike in inflation.'

Freight rates: Freight rates continue to rise to new highs. In Shanghai, some container port operations are halted as the Typhoon Chantu approaches the city. Ningbo port, China's second-biggest container transporting hub after Shanghai, had suspended operations since Sunday noon. The port just resumed from a weeks-long port congestion, following typhoon In-Fa in late-July and a COVID-19-related terminal closure in mid-August.

US labour market: Given how much weight the Fed puts on employment, it is crucial to monitor the labour market to get an idea of what the Fed is going to do over the next years. The weak jobs report for August was a disappointment and we have dived into several labour market indicators to get an idea of what is going on in the US labour market. In our view, it is difficult to solve the mismatch problems within manufacturing near-term (where it is hard to find qualified workers) but the fact that the temporarily higher unemployment benefits have now expired, we think some of the bottlenecks in "leisure and hospitality" will ease in coming months. For more details see US Labour Market Monitor: Weak jobs report - noise or a signal of something else?, 13 September.

Norwegian election: In Norway, the preliminary (88 % of votes counted) results clearly suggest a change of government as expected. The Labour party will regain the power with the support of the Centrists Political Part and the Social Lefts Party, with 88 of 169 mandates. We expect no market reaction.

Equities: Equities started the week on a higher note, lifted by energy and financials. Value outperformed growth and small cap outperformed large cap as tech and health care sold off. The risk on mode yesterday took VIX back down below 20. In the US, Dow +0.8%, S&P 500 +0.2%, Nasdaq -0.1% and Russell 2000 +0.6%. The positive tone continuing this morning with most Asian market higher and the same goes for European and US futures.

FI: It was a slow start to the week with focus on the new 7y NGEU issuance that was announced in the morning in what is to be expected to today's business. It will come on top of an already issuance-heavy day with 30y Dutch tap as well as 2y German and Italian supply in the 3y, 7y and 30y segments (up to 2bn of 0% 2024, up to 2bn of 0.5% 2028 and up to 1.75bn of 1.7% 2051). While this week is significantly net cash negative, we still expect to see solid demand across the jurisdictions. EGBs ended virtually unchanged with some outperformance in Greece and Italy.

FX: As expected, EUR/USD continues to move largely in line with global equities and relatives such as US vs Europe, or value versus growth. Though there are a few noticeable releases this week, we largely expect the very high correlation between EUR/USD and equities to persist as the market narrative will be largely unchanged up until the FOMC meeting next week.

Credit: Credit markets sold off slightly yesterday, where iTraxx Xover widened 0.5bp (closing in 227.8bp) and Main closed in 44.8bp (0.1bp wider). HY bonds widened 1bp and IG bonds were unchanged.

Nordic macro

Focus in Sweden is on the August inflation outcome which in our view is highly uncertain due to erratic price behaviour for foreign airline tickets and charter packages. August inflation in Denmark and Norway seems to suggest a slight downside vs our forecast when looking at food, restaurant and clothing prices. We look for a CPIF ex. Energy print that is spot on Riksbank's forecast which, however, is 0.2 p.p. lower than the market consensus.

We expect Norges Bank's regional survey to signal a slowdown in Q3. The reason, quite simply, is that the greatest boost from the lifting of restrictions and increase in mobility has already materialised. This was reflected in the aggregated output index climbing in the previous survey from 0.92 to 1.88, equivalent to annualised growth of 3.75%. We therefore expect the output index to drop to somewhere between 1.25 and 1.50 this time around, indicating annualised growth of 2.5-3.0% over the next two quarters. It is important to stress that such a slowdown would be in line with the projections in Norges Bank's June monetary policy report and so have no impact on the interest rate decision next week.